Thursday, March 01, 2012

Credit Default Swap Judgment Day Upon Us

A secretive panel of representatives from 15 large banks, hedge funds and investment houses holds the key to potential multibillion-dollar payouts to investors as a Greek default looms. The group meets Thursday morning to rule whether Greece's debt restructuring should trigger payments on insurance-like contracts known as credit-default swaps, or CDS. The impact of their decision will reverberate beyond the narrow confines of the Greek debt market and could affect investors across other European bond markets and the holders of $2.9 trillion in CDS on government debt around the world.

People bought the credit-default swaps with real money, thinking they were insuring the risk of a default. Now, those who bought them from financial vendors with regard to Greece's debt stand not only to get pennies on the dollar with the bonds themselves, but no indemnity from the CDS. Who are these vendors and how many of them are represented by interests on the "secretive panel?" "Thieves break through and steal" in numerous and sometimes very sophisticated ways.